We lower the forecast for this year and next because of the persistent shocks to manufacturing demand and we now see more downside than upside risks. Manufacturing production will decelerate rather than accelerate this year. Production increased 2% last year and we forecast growth of only 1.1% in 2016, 2.4% in 2017, and 2.5% in 2018.

Productivity growth in the computer and electronic products subsector, once the principal driver of productivity performance in the manufacturing sector, has experienced significant waning in recent years. Consequently, the U.S. manufacturing productivity outlook has become murky. This is a challenging trend for our society, because increased productivity growth helps lift living standards. The good news is that empirical evidence put forth in this paper shows that innovation and capital investment play a key role in accelerating multifactor productivity growth (i.e., output per unit of a combined set of inputs including labor, materials, and capital) in a wide range of manufacturing industries.